A Plug for Terrorism Insurance Gap?

With property owners facing spiraling premiums, a federal backstop on terrorism insurance cannot come soon enough, say commercial real estate professionals. In mid-July, the Mortgage Bankers Association of America reported that, based on its own survey of members, more than $8 billion worth of deals have either been killed, delayed or changed this year due to a lack of affordable terrorism insurance.

According to MBA, its commercial mortgage members originated $73.8 billion in commercial loans in 2001. Experts predict that figure will drop by 20% to 40% this year primarily because of the lack of terrorism insurance coupled with the weak economy.

And though a solution appears imminent — the House and Senate have both approved measures and President George W. Bush has repeatedly indicated he will sign the bill — problems will persist until the government puts its plan into law, experts maintain. Those familiar with the issue say that it may take until October for a final resolution to be signed by the president, at which time the coverage will take effect immediately.

In its most likely incarnation, according to several sources, the government program would bail out insurers on losses above $10 billion and below $100 billion. Industry leaders hope a federal backstop will enable insurance companies to quantify the risk of terrorism and re-enter the market with reasonably priced products.

“The lack of terrorism insurance has cast a pall over the whole commercial real estate industry,” declares Mark Zandi, Economy.com's chief economist. “The private marketplace will not compete on its own, so there is a place for government here.”

Julie Rochman, a spokesperson for the Washington, D.C.-based American Insurance Association, says that a growing number of properties are dangerously under-insured or “going bare,” which means not carrying the insurance at all.

A Curveball for Baseball

The effect of the insurance problem is felt in all sorts of commercial properties, not just trophy office towers. For example, when the owners of the Seattle Mariners went shopping for new property insurance for their $517 million Safeco Field last year, they learned that insurance companies now regard sports stadiums as terrorism risks.

In October, as the American League West champs scrambled to renew their insurance, they found few takers. Moreover, the only coverage the team could obtain excluded acts of terrorism, forcing it to buy an additional policy — which covers only $1 million per incident.

Before Sept. 11, owners of commercial buildings could buy property insurance that covered all damage except acts of war. For example, last summer a $500 million Class-A property in New York paid a yearly premium of roughly $150,000.

After the terrorist attacks, the insurance game changed — and prices skyrocketed. Property insurance doubled, bringing the yearly premium costs for a $500 million building to $300,000. More importantly, the new property policies excluded terrorism coverage, creating the need for owners to buy an additional policy.

What's the cost today to insure a $500 million building for terrorism? Up to $3 million a year for a policy that covers only $300 million of the property's value and includes a roster of exclusions.